HARRISON v. ADAMS ET AL (1941)

This is an action on a note and for an equitable set–off. The plaintiff has appealed from that portion of the judgment which denied him the right to use this note as a set–off against a prior judgment obtained against him by Henry J. Adams. While two appeals were taken they have been consolidated. Pending the appeal the plaintiff died and the executrix of his estate has been substituted. For convenience, we will refer to the original plaintiff and appellant.

The appeal is presented on the judgment roll and the facts, as found by the court, are as follows: On April 15, 1938, Henry J. Adams obtained a judgment against Harrison for $11,000. Harrison appealed and, to stay execution, deposited the amount of the judgment in cash with the county clerk. On April 26, 1938, Adams assigned this judgment to one Meyers, a secretary in the office of two of his attorneys. On the same day, a notice of this assignment was filed in that action and served on Harrison. On May 20, 1938, Adams assigned any interest he might have in that judgment to the respondent, Verda Adams. Notice of this assignment was given to Meyers but no notice thereof was given to Harrison “except such notice as might be imputed from the notice of the assignment of the judgment from Henry J. Adams to F. N. Meyers”. On July 15, 1938, one Russell endorsed to Harrison a note for $3,808.70, which had been given to Russell by Adams, and at the same time a contract was entered into between Russell and Harrison which provided that the assignment of the note was for the purpose of collection and that Russell was to receive two thirds and Harrison one third of any amount collected.

The judgment against Harrison was affirmed on appeal (Adams v. Harrison, 34 Cal.App.2d 288, 93 P.2d 237) and became final on or about October 23, 1939. Thereafter, Harrison brought this action seeking, among other things, to set off the Russel note, proportionately against the judgment obtained by Adams, who was then insolvent. A showing was made by Meyers that she had no interest in the judgment and that the assignment to her had been made for the purpose of enabling a portion thereof to be paid to Adams' attorney in the former action. This amount was paid and the balance of the deposit was retained by the clerk, under court order, subject to the outcome of this action. The court held that Harrison was not entitled to set off the Russell note against the Adams judgment, and that Verda Adams, by reason of her assignment, was entitled to the money remaining in the hands of the county clerk. This appeal followed.

The general rule is that the assignee of a judgment acquires no better right than the assignor had at the time of the assignment. Section 368 of the Code of Civil Procedure reflects this principle. Arp v. Blake, 63 Cal.App. 362, 218 P. 773. In the absence of notice of the assignment of a judgment the judgment–debtor may offset a cross–demand which has not been reduced to judgment. Machado v. Borges, 170 Cal. 501, 150 P. 351. He may also acquire claims against the judgment–creditor from other parties and set them up in reduction of his obligation if he acquires such claims before he knows that the judgment against him has been assigned to another. Haskins v. Jordan, 123 Cal. 157, 55 P. 786.

In the instant case, the appellant knew that the judgment against him had been assigned to Meyers but did not know that any remaining interest therein had been thereafter assigned by Adams to the respondent. It appeared at the trial, however, that the assignment to Meyers was for a limited purpose and covered but a portion of the judgment. Any interest thus conveyed has been taken care of and is not involved here. The remainder belonged to Adams and would still be his and subject to any rights of the appellant but for the fact that this remainder was subsequently assigned to the respondent. The appellant had no notice of this later assignment. Under the authorities above mentioned it might well be held that with respect to the interest she took in the judgment the respondent is in no better position than Adams would have been had he not made that assignment.

The controlling question here is whether Harrison acquired such an interest in the Russell note as, under the existing circumstances, he is entitled to use as an offset against the Adams judgment. It may first be noted that he gave no notice that the Russell note had been assigned to him, which suggests the interesting question whether the action brought by him is not subject to the provision of section 368 of the Code of Civil Procedure, which reads: “In the case of an assignment of a thing in action, the action by the assignee is without prejudice to any set–off, or other defense existing at the time of, or before, notice of the assignment.”

Be that as it may, we think the appellant did not acquire the Russell note in the sense necessary to enable him to use it for his own purposes by offsetting it here, either as against Adams or as against his assignee, the respondent herein. He held the Russell note under an express contract that he took it for collection only, and that two thirds of any amount collected belonged to Russell and one third to himself. He had no real interest in the note until collection was made and even then two thirds of the proceeds belonged to another. He did not own one third of the note in such a way that he was free to use that part by itself and he could benefit himself here only by using the note in its entirety, which would involve using as his own and setting off rights in a claim which actually belonged to another.

Whether or not a judgment–debtor is entitled to set off an obligation of the judgment–creditor which has been assigned to him for collection only has not been directly decided in this state, so far as we are advised. To permit this to be done would seem to be violative of the general rules of mutuality of demands and identity of interest which have always been applied in allowing one claim to be set off against another. The general rule is stated in Arp v. Blake, supra [63 Cal.App. 362, 218 P. 775], and other cases, as follows: “The right of set–off exists when the parties hold cross–demands under such circumstances that in equity they should be applied one against the other and only the balance be recovered.” In Jones v. Chalfant, 55 Cal. 505, Jones recovered a judgment against Chalfant. Chalfant moved to set off a judgment previously recovered against Jones by one Hall and which Hall had assigned to Chalfant. It appeared that Jones had been notified of this assignment. Jones had assigned his judgment to his attorneys, who alleged that it had been assigned to them for value before they had any notice of the assignment of the Hall judgment, and that Chalfant had paid nothing for that judgment. The court affirmed an order denying Chalfant the right to offset the Hall judgment, saying that it was not satisfied that the evidence disclosed that Chalfant was the absolute owner thereof. In speaking of that judgment, the court said: “The assignee must show that he is really the absolute owner of the judgment, or he cannot set it off”. The appellant argues that this is no longer the law in this state since more recent cases have held that an assignee for collection has the entire control over an assigned claim or judgment and may sue thereon in his own name. Morrison v. Veach, 190 Cal. 507, 213 P. 945; Bechtel v. Baglieto, 13 Cal.App.2d 495, 57 P.2d 192. While it is well settled that an assignee may sue in his own name the further question is here involved whether he can use a claim as his own and for his own purposes while another person has an equitable interest in it.

The appellant further contends that the case of Hammell v. Superior Court, 217 Cal. 5, 17 P.2d 101, is decisive of the problem now before us. We do not so understand that case. The court was there considering whether the superior court had jurisdiction of an action upon several assigned claims when the amount of each claim was less than the jurisdictional minimum of the superior court, and the claims had been assigned to a single plaintiff solely for collection. It was there said that the jurisdiction of courts should not be made to depend upon the character of the plaintiff's ownership of the claims, that is, whether it was both legal and equitable or merely legal and solely for the purpose of collection. While the rule there laid down is eminently proper with respect to the question of jurisdiction, or the proper court for an action or actions which the plaintiff is entitled to bring, it is hardly controlling on the further question now before us as to whether a plaintiff, having merely the legal title to a claim, may use it as his own when the equitable ownership is in another. Under established rules, if this note was Russell's it could not be offset and used to pay a debt owed by Harrison to Adams. In fact, Russell is the equitable owner and Harrison will never have more than a one–third interest in it and cannot have that, so far as material here, unless the entire amount is applied as a set–off to the Adams judgment. For present purposes, Harrison is attempting to set off in payment of his own debt a claim which equitably still belongs to Russell, and the larger part of which will never belong to Harrison.

The appellant further relies on the case of Del Monte Ranch Dairy v. Bernardo, 174 Cal. 757, 164 P. 628, 630, in which the defendant attempted to set up a counterclaim for goods sold by him to the plaintiff and which claim he had previously assigned to another. The court referred to the fact that the defendant testified that the assignment was only for the purposes of collection and said: “But if it was absolute in terms, was in fact an absolute assignment, even though the unexpressed purpose was to obtain collection, it of course transferred the claim, and left defendant without any right of action thereon against plaintiff.” The judgment was reversed as to the counterclaim issue for the express purpose of determining whether an absolute assignment of the claim sought to be set up as a counterclaim had been made. That case involved only the question as to which party had a right to maintain an action on the claim and has no bearing here unless the holding that evidence should be received as to whether or not an assignment is absolute is suggestive. In the case now before us, it appears without question that the assignment of the Russell note to the appellant was not absolute but was expressly made for collection only by a contract through which the assignor retained not only a present interest but the larger final interest.

It seems to us that under the circumstances here appearing Harrison had not such an ownership in the Russell note as entitled him to use the same as a set–off against his own debt, and that in equity he should not be allowed to thus use Russell's property. To permit this would also be to ignore the basic reason for, and to violate the fundamental principle involved in, allowing such set–offs. They are allowed only where the parties hold cross–demands which equitably should be extinguished and only the balance paid. That means, logically, that the judgment–debtor is not, in such a case, to pay in cash that part of the judgment represented by the claim which is offset. Here, the appellant has deposited the full amount in court and he wants the full amount paid on the judgment. In effect, he asks that this part of the money be paid to a third party who is not interested in the judgment, and has no lien thereon, to the end that he may himself profit to a lesser extent from this benefit to the third party. This more nearly resembles an attempt to obtain the effect of a lien where none exists, than an extinguishment of cross–demands.

A further consideration is that an assignee for collection is really a trustee for his assignor. Such a trustee may not deal with the trust property as his own or use it for his own benefit without the consent of his principal. Elam v. Arzaga, 122 Cal.App. 742, 10 P.2d 805. While Russell is not here complaining of what the appellant wants to do with the note in this action the existence of this thoroughly established rule furnishes support to the view that the appellant should not be permitted to employ this equitable proceeding to enable him to use for his own, and for his own purposes, property which equitably belongs to Russell. And it further emphasizes the fact here existing that there is not the mutuality of claims which has long been required in allowing such a set–off.

The judgment is affirmed.

BARNARD, Presiding Justice.

MARKS, J., and WEST, J., pro tem., concurred.